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Every wealthy person ($2MM+ net worth) should have real estate exposure as a % of their portfolio.
The key to investing in real estate as a limited partner:
1. Understand the fundamentals of real estate.
2. Understand the assumptions that the sponsor is making.
A thread
The key to investing in real estate as a limited partner:
1. Understand the fundamentals of real estate.
2. Understand the assumptions that the sponsor is making.
A thread
Because the sponsor can make a spreadsheet look however he wants it to look.
And there are a lot of bad (from a risk adjusted return basis) deals out there with highly speculative factors.
Here are a few examples of questions you should ask and things you should consider.
And there are a lot of bad (from a risk adjusted return basis) deals out there with highly speculative factors.
Here are a few examples of questions you should ask and things you should consider.
What type of debt (and how much) is being used to finance the purchase?
What is the debt yield and the debt constant? (less spread = more risk)
What is the in-place cap rate? First year?
What type of interest rate would it take to cause the project to go cashflow negative?
What is the debt yield and the debt constant? (less spread = more risk)
What is the in-place cap rate? First year?
What type of interest rate would it take to cause the project to go cashflow negative?
What are the refinance assumptions? How much debt is being taken on at what cap rate valuation and what interest rate?
What is the lease up assumptions? Revenue is the risk factor.
Can you really raise rent that much? Why? How? What if you can't?
What is the lease up assumptions? Revenue is the risk factor.
Can you really raise rent that much? Why? How? What if you can't?
What if the market turns and we can't get debt at the terms you are projecting?
How would this deal look if vacancy / delinquency increased by 10%? (covid)
What is the cashflow in a worst case scenario? Is there any? Will we lose the property?
How would this deal look if vacancy / delinquency increased by 10%? (covid)
What is the cashflow in a worst case scenario? Is there any? Will we lose the property?
How much cash are you putting into the deal? What are the fees? How much work are you really doing here?
Are you (the sponsor) incentivized to collect fees? Cashflow? Over-leverage? Sell? Hold?
Does that align with my goals?
Are you (the sponsor) incentivized to collect fees? Cashflow? Over-leverage? Sell? Hold?
Does that align with my goals?
What is the TAX treatment of this deal? How does it effect me? How does it change incentives?
What % of bonus depreciation am I getting? What is my tax shield from ongoing depreciation?
How much recapture am I going to be on the hook for when you sell?
What % of bonus depreciation am I getting? What is my tax shield from ongoing depreciation?
How much recapture am I going to be on the hook for when you sell?
If you turn out to be a terrible operator can the LPs get you out?
What if we can't sell anywhere near the cap-rate you are projecting?
What if the interest rates go up and the cap rates expand?
What if we can't sell anywhere near the cap-rate you are projecting?
What if the interest rates go up and the cap rates expand?
Good LPs (limited partners, passive investors) ask these questions and understand the dynamics of the ASSUMPTIONS that are being made in a deal.
Not just what shows up on the deal offering memorandum.
Not just what shows up on the deal offering memorandum.
Where do you find deals?
You ask other wealthy people who they invest with.
You look for real estate syndicators on Twitter.
You invest through a family office or a wealth manager (I have a rec if you need one).
You network.
You ask other wealthy people who they invest with.
You look for real estate syndicators on Twitter.
You invest through a family office or a wealth manager (I have a rec if you need one).
You network.
How to be a good LP?
Read your email reports before you ask questions.
Ask good questions on the initial calls that show you have an understanding of real estate.
Ask the hard questions if they need to be asked.
But respect your operator as a partner.
And thats it.
Read your email reports before you ask questions.
Ask good questions on the initial calls that show you have an understanding of real estate.
Ask the hard questions if they need to be asked.
But respect your operator as a partner.
And thats it.
Can't find a good operator or don't have the liquidity to put $50k into a real estate deal?
Buy REITs like Public Storage etc.
You miss out on the tax advantages and a lot of yield, but it's great to have SOME assets tied to real estate.
Buy REITs like Public Storage etc.
You miss out on the tax advantages and a lot of yield, but it's great to have SOME assets tied to real estate.
To the sponsors out there - what questions do you love to get from your LPs?
If you were an LP what would you be sure to ask?
@Keith_Wasserman @scottyo21 @MattLasky @scottyo21 @evanmr @fortworthchris @philiphartz @laughridge @SSal1234
If you were an LP what would you be sure to ask?
@Keith_Wasserman @scottyo21 @MattLasky @scottyo21 @evanmr @fortworthchris @philiphartz @laughridge @SSal1234
